Unfazed by credit card rate hikes? You still need a plan to pay your balance off

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Give yourself a pat on the back, America. If you’re one of the millions of Americans who owe money — whether it’s a mortgage, auto loan or credit card balance — you’ve probably done a pretty good job paying your bills, even after the Federal Reserve boosted a key interest rate.

That’s the finding from a new study by the credit bureau TransUnion, which showed most consumers were able to absorb higher monthly payments on their variable rate loans.

Those minimum monthly payments increased when the interest rates on credit cards and home equity lines of credit rose following the central bank’s December 2016 rate hike. (The Fed increased its benchmark lending rate again in June, but the most recent hike was not part of the study.)

A previous TransUnion study predicted that even a modest rate increase had the potential to sink those already in a precarious financial position.

“This is great news for consumers,” says Ezra Becker, senior vice president of research and consulting at TransUnion. “Most consumers appeared able to reallocate their available cash, or make small changes to their spending habits, to effectively absorb the December rate increase.”

What does this mean for you?

The twin Fed rate hikes have helped push interest rates on existing credit cards and home equity lines of credit as much as half a percentage point higher. Paying the minimum monthly payment means you’ll be in debt for a bit longer — and pay more in interest.

Here’s an example: If you have $5,000 in credit card debt, pay the minimum each month and are charged an annual percentage rate of 15.5 percent, it would take you 10 years and four months to pay off your debt, and you’d pay $2,286 in interest. When your APR jumps to 16 percent, add two months and more than $100 extra in interest payments to your tab.

That may not sound like much, but that extra cash out of your wallet is 100 bucks less than you could have placed into a savings account.

Higher costs in the future

Even if you held no debt impacted by the rate increases, it’s important to know that you could still feel the effect in other ways.

“The cost of new credit absolutely goes up even with a quarter point increase in rates,” says TransUnion’s Becker.

This is especially true for credit cards, home equity lines of credit and even auto loans.

If you’re considering applying for a new credit card, only do so if you’re confident you can pay off the balance on time and in full every month so you won’t be hit with interest charges.

Protect your budget

Make sure your monthly expenses aren’t swamping your budget so you have some cushion when there’s another increase. If you’re dipping into savings to cover an increase in your payment obligations, it’s probably time to reevaluate your budget.

Develop a spending plan so you can pay down more of your high-interest credit card debt. You may want to consider using a balance transfer credit card to help save on interest and get your bill paid off more quickly.